Recall Jesse wanted to explore how upside down markets manifest in corporate profit, inflation, and equity valuations.
Fiscal stimulus works through the power of government deficits. The government puts more income into the economy through spending than it takes out through taxation, causing aggregate income to rise.
So he needs to connect fiscal stimulus to income.
<aside> 👉 First, a quick aside. I find macro to feel like voodoo. The ZeroHedge crowd has been expecting hyperinflation since the GFC and Japan has acted like an alien for so long that there's a joke that goes "you are not really a macro trader unless you've lost a small fortune being short JGBs."
Jesse's approach has a notably different feel. It starts from first principles: accounting identities. Much more satisfying than the macro astrology we are used to seeing. Jesse uses the Kalecki-Levy accounting identites to derive a profit equation. This is a precise analytical relationship between govt deficits and corporate profits.
The paper walks thru this derivation in tremendous detail with supporting data and represents a standalone body of work on its own. I encourage you to give your brain some exercise and take a lap thru it.
</aside>
For the purpose of this explainer we are going to skip to the rewards of the derivation:
We are able to understand:
If the risks of stimulus are less applicable this time, we may find ourselves normalizing reliance on it.
This is the gateway to the world of:
fiscal income targeting
The govt realizes it can spend to achieve the desired amount of growth. The govt can literally spend enough to maintain corporate profits and therefore aggregate income. Today no govt maintains such a mandate. So we should be aware of what lessons or presumptions we may mass internalize.